Budget and Business Minister Jane Hutt unveiled the draft Assembly Government Budget, which she said would fall by £860m next year and be £1.8bn lower by 2014-15.

“By 2014-15, our capital budget will reduce by 40%. This will have a major impact on the private sector and on our ability to invest in schools, hospitals and the critical infrastructure that is needed to support the fragile economic recovery,” she warned.

Spending on health, social services and schools has been largely protected, although planned 7% cuts will fall mainly on building projects.

Hardest-hit in the draft budget are economy and transport spending and housing and environment, both down by more than 21% over three years.

Within the larger department budget spending on social housing is expected to fall by a third.

This will see big infrastructure projects like building roads, hospitals and schools cut dramatically over the coming years, with many planned schemes delayed or cancelled altogether.

But the Welsh Budget minister said savings from this year’s budget would be used to deliver a small short term boost to construction

“Through prudent management of our Budget this year I will be announcing a further £47m of capital expenditure next week in education, health, the environment, heritage and housing – much of this will be good news for the construction industry in Wales.”

Further details about how the draft Budget will impact on portfolio areas will be announced over the next few days.

Nick Bennett, chief executive of Community Housing Cymru, warned that social housing had suffered heavy blow because spending had been brought forward in previous budgets.

He said: “The announcement that social housing grant in Wales will be cut by 30% next year, reducing the budget to just over £69m with proposed cuts of 15% and then 20% for the following two years, comes as a bitter blow to the sector.”